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Diesel bulls must still play a waiting game. European maintenance does not peak until May, two months later than last year, and demand in Q1 18 has been hobbled by unusually warm weather. European heating oil demand likely fell by at least 0.2 mb/d y/y in January, as Germany and France recorded the warmest weather in at least 10 years.

Stockbuilds are normal for this time of year, but supplies are currently running well ahead of demand, and this year the imbalance has been brought into starker relief because traders gave up tank leases at the end of 2017 in anticipation of a backwardated market. Oversupply at the prompt has been exacerbated by a flurry of exports out of Saudi Arabia and even Brazil.

Conversations during our visit to Saudi Arabia suggested the heavy outflows are the result of scheduled refinery work happening later than the market expected, high pre-turnaround runs and, most importantly, weak demand. Saudi refinery maintenance schedules are notoriously opaque, but we expect maintenance to be higher y/y by 0.3 mb/d in April.

The planned Saudi work coincides with heavy spring turnarounds in India, where state-owned refiners have been requesting additional March allocations from local export-orientated refiners against a backdrop of solid demand. But these plants are also undergoing maintenance at that time, so they may not be able to cover all requirements, potentially prompting spot imports.

Beyond heavy turnarounds, Indian balances are also reflecting the return of Indian diesel demand to rapid growth following an anaemic 2017. In January, diesel demand leapt by 0.20 mb/d, building on growth of 0.13 mb/d in December. While a re-run of July 2017, when Indian buying decisively reversed the East-West arb, is unlikely, the market does not appear to have fully registered the impending tightness in India.

OECD middle distillate stocks ended 2017 some 12 mb below the five-year average, compared with a surplus of 49 mb a year earlier, so meeting any y/y tightening in Q2 18 balances will largely need to be achieved via incremental runs. Net CDU expansions are limited this year at 0.7 mb/d, most of which is biased to the latter part of the year, however, and simple margins are poor.

Even if European distillate stocks built m/m by 23 mb in January, a similar level to the unusually large build seen in January 2017, the region’s surplus to the five-year average would still be a relatively small 7 mb, compared to a surplus of 39 mb by end-January 2017, and this surplus will be needed as we enter the spring.

So, while January may have been weaker than expected, the case for a bullish spring remains intact as long as our assumptions on global demand growth hold. Stock markets are still reeling from massive corrections set off late last month, but there is nothing to suggest that resurgent strength in real economic indicators is about to fade. The diesel-led oil market rebalancing has been hobbled by weak heating oil demand, but it has not been reversed.